Physical Capital, Human Capital, and Foreign Direct Investment: The Case of Growth in Asian Economies

 This is my latest paper presented in the 14th Convention of East Asian Economics Association at Chulalongkorn University, Bangkok, Thailand, November 1-2, 2014.

Abstract

This study estimates economic growth during 1980-2013 for thirty-one countries in Asia. The study uses the Augmented Solow Growth model, which includes human capital in the production function. The model then relaxes the assumption of exogenous technology to be determined by foreign direct investment net inflows under the hypothesis of flying geese, which states that the technological advancement that led to industrialization in Asia was transferred from the advanced economies. We estimate GDP growth in Asia using four scenarios: overall pane, data analysis, geographical group panel, speed of growth group, and individual country. The techniques used for the estimation are panel data ordinary least square with fixed effect, vector autoregressive estimation, and the robust least square for individual country analysis. We found that overall Asian economic growth is determined by the share of foreign direct investment of GDP and the share of physical capital of GDP. However, human capital share to GDP becomes an important determinant of GDP per capita growth using vector autoregressive analysis. When we consider  geographical region, East, South, and Southeast Asia share the  determinants of GDP per capita growth:  foreign direct investment and physical and human capital. For central Asia, only human capital plays an influential role in GDP per capita income. In the Middle East, the study found that foreign direct investment net inflows have determined growth in the region in last three decades. Countries with a high rate of growth use both foreign direct investment and physical capital to promote their growth. For the medium growth group, the countries have physical capital, human capital and a limitation on population growth, technological change, and depreciation rate as the factors of growth. Slow growth countries use only physical capital to grow, and the negative growth countries use foreign direct investment and human capital to determine their growth.

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